Interval Funds – Features, Suitability and Taxation

What are Interval Funds?

Interval fund is defined as a sort of investment that a company offers to repurchase its shares from shareholders regularly. In other words, the fund promises to buy back a specified part of its shares from shareholders regularly. Shareholders are under no obligation to accept these offers and sell their shares back to the fund. Interval Funds can invest in either equities or debt instruments or both. These funds’ units can only be purchased and/or redeemed during particular time intervals. The fund house announces the times when investors can sell or purchase units. They are similar to closed-ended funds in that you cannot buy or redeem units regularly.

Key takeaways from Interval Funds:

• Interval Funds are described as a combination of open-ended and closed-ended mutual funds which provides the issuer with an opportunity to buy back their shares from shareholders.
• Interval Funds are non-liquid and generally are not preferable with a viewpoint of risk.

Features of an Interval Fund

1. Risk: Interval funds are not really useful in an emergency. They are completely non-liquid. They cannot be redeemed on any secondary market. Even if an investor is willing to pay the exit load, he/she cannot exit before or after the time period specified.

2. Returns: When it comes to returns, interval funds are not the best choice. The majority of interval funds in India offer an annualised 5-year return of 6% to 8.5%. When compared to other types of funds, their returns are quite modest when translated to shorter time periods.

3. Investment Horizon: Interval funds are mostly used to achieve short-term objectives. Investors with investment horizons that correspond to the maturity dates of interval funds can invest in them for short-term returns. You must have certain goals in order to use the lumpsum that interval funds provide upon maturity.

4. Financial Goals: Interval funds are best suited for investors who are unsure about the duration of their investment since they are essentially fixed income schemes. They are also appropriate for investors looking for lump sum amounts at a set period of time. Investors can accomplish this by aligning their horizon with the time interval during which redemption is allowed. Furthermore, since they are mostly debt-oriented, they are unable to provide particularly high returns. therefore, these funds are best suited for investors with a low-risk appetite.

How do Interval Funds Work?

1. Interval Funds are a mixture of open-ended and closed-ended mutual funds. 

2. While only a small number of plans are launched as interval funds, some may also be listed on the stock exchange.

3. Investors can buy/sell units at the current NAV (Net Asset Value) at specified intervals. 

4. Since the fund house decides when the units can be redeemed, the fund manager is able to develop a solid investing strategy without having to worry about redemption demands or liquidity.

5. Although interval funds provide higher returns than regular mutual funds, they are also more costly and less liquid.

6. Interval funds may be a beneficial investment if the investor does not require liquidity and the profits outweigh the expenditures, particularly when compared to a regular fund.

7. Interval mutual funds frequently outperform open-ended mutual funds in terms of returns. It enables regular investors to get exposure to unconventional assets and with low minimums, investors may invest in institutional-grade alternative investments. The asset management company makes periodic buyback offers to investors at NAV.

Who Should Invest in an Interval Fund?

These are one-of-a-kind funds that invest in non-liquid assets and are perfect for investors seeking unconventional assets. They are also appropriate for investors with short-term financial goals and a low-to-moderate risk tolerance. Interval funds typically invest in unconventional assets such as commercial real estate, forestry tracts, company loans, and so on.

Taxation of Interval Funds

Interval Funds are taxed similarly to other mutual funds based on the amount of debt or equity invested. For tax reasons, debt funds must have at least 65% of their portfolio in debt, whereas equity funds must have at least 65% of their portfolio in equity. Since the majority of interval funds are essentially debt-oriented, the long-term capital gains tax applies if the fund is held for 36 months or longer. Long-term capital gains are subject to a 20% tax rate with indexation benefits. By adjusting the purchase price of securities for inflation, indexation permits investors to be taxed on returns that exceed the inflation rate. Short-term capital gains are considered part of income and are taxed according to your income slab.

List of Interval Funds in India

Name of the Fund	1-year Return	3-year Returns	5-year Returns
ICICI Prudential Interval Fund	6.79	8	9.54
IDFC Yearly Series II Interval Fund	8.55	7.47	8.03
UTI Fixed Annual Interval Income Fund	7.31	8.63	9.9
Reliance Interval Fund – Annual	7.99	7.46	7.85
Reliance Yearly Interval Fund	8.53	7.71	7.98